Before then, the agency, in its mission to improve a nearly 200-acre portion of the city's downtown and environs, had relied on loans from the city's general fund through the decades when it didn't have enough tax revenue to finance itself.

In late April, the California Department of Finance ruled that one of those loans, worth about $2.5 million, wasn't permissible and, officially speaking, not an "enforceable obligation."

The state ruled that the money, which Costa Mesa officials argue should go back to the city's general fund, will be collected and then potentially redistributed to other taxing entities, including the school district and county library branches.

If the city sues, it would attempt to "recoup" those funds, officials said last week.

"It's a theft of our money," said city CEO Tom Hatch. "We followed the rules, and we followed the law ... we're going to pay it, but we're looking at legal options very clearly. The council doesn't feel this is right."

Mayor Jim Righeimer said the council hasn't voted on taking legal action yet because there may be other ways to settle the matter with lawyers aside from litigation.

"We do believe that the city is owed the money," Righeimer said, "and we're gonna do what we need to do to get that released back from the state."

City officials met in Sacramento on April 4, providing extensive documentation on the history of the RDA loans to prove its case, though the state later upheld its arguments.

Thousands of hours spent by staff and legal counsel went into attempting to prove to the state "what's already ours," Hatch said, adding that Costa Mesa is not the only city affected by the demands.

"Once again, Sacramento changes the rules midstream and gives everybody in local government the sense of why we need a charter in our city," Mayor Pro Tem Steve Mensinger said. "Ultimately, it's all about local control because Sacramento continues to change rules 40 years after they establish the RDA, and today we're paying $2.5 million for that."

Councilwoman Wendy Leece called the $2.5 million — which would be taken from the city's general fund — an unanticipated cost.

Furthermore, Costa Mesa is probably going to spend more in attorney fees in the attempt to fight the demand and must look for more revenue sources, potentially from the business license tax, Leece said.

"So, for me and others, it's all the more reason to do a good, in-depth study of our business license fee structure to see if we can generate more revenue from restructuring," she said.